Ethics and Cash Flows
You are the accountant for Nello Company, which manufactures specialty equipment. Nello has been in financial difficulty, so its suppliers require purchases to he paid in cash. Furthermore, Nello has long-term debt with a debt covenant that requires it to maintain a 1:1 acid-test (quick) ratio. Nello’s employees work a 5-day week, Monday through Friday.
On Wednesday morning during the last week of the current year, Sam (the production supervisor) comes to you and says, “I don’t understand it. We have this large special order from a customer that must be delivered at the end of the first week in January. Once we get the raw materials, it is going to take 5 solid days of work without overtime to produce the order. If Bob (the president) would let me order the raw materials this morning, we could have them by late today. This would give us 2 days this week and the 4 days after New Year’s Day (Monday) of next week to complete the order without incurring overtime costs. But Bob says we must wait until next Tuesday to order the materials. This means we will have to work double time that Wednesday through Friday to finish the order. That overtime cost is going to really increase next year’s factory salary expense, so our profit and operating cash flows from that order will be very low. Please talk to him.”
When you approach Bob about buying the raw materials this morning, he says, “If we purchase those materials today, we will have to write a check. And that means our cash flow from operating activities for this year will be much lower, which our shareholders won’t like. Furthermore, our quick ratio will go down from 1.01:1 to 0.90:1, so our creditors may be upset. I know our profit and operating cash flows for next year will be lower if we delay the purchase, but that seems to be the best decision. Don’t you agree?”
Required:
From financial reporting and ethical perspectives, how would you respond to Bob?
Managerial Accounting: The Cornerstone of Business Decision-Making
Financial And Managerial Accounting
College Accounting, Chapters 1-27
Financial Accounting
Accounting Information Systems
Financial & Managerial Accounting
Corporate Financial Accounting
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
Essentials of Business Communication (MindTap Course List)
Essentials of Economics (MindTap Course List)
Contemporary Marketing
MKTG 12:STUDENT ED.-TEXT
Brief Principles of Macroeconomics (MindTap Course List)
Accounting Information Systems
Foundations of Business (MindTap Course List)
STATISTICS F/BUSINESS+ECONOMICS-TEXT
Fundamentals of Financial Management (MindTap Course List)
Principles of Microeconomics (MindTap Course List)
Management, Loose-Leaf Version
Principles of Macroeconomics (MindTap Course List)
ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
Principles of Economics (MindTap Course List)
Accounting (Text Only)
Financial & Managerial Accounting
College Accounting (Book Only): A Career Approach
Financial Accounting
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Exploring Economics
Statistics for Business & Economics, Revised (MindTap Course List)
College Accounting (Book Only): A Career Approach
College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
Principles of Macroeconomics (MindTap Course List)
Pkg Acc Infor Systems MS VISIO CD
Fundamentals of Financial Management (MindTap Course List)
Survey of Accounting (Accounting I)
Corporate Financial Accounting
PAYROLL ACCT.,2019 ED.(LL)-TEXT
Economics For Today
Practical Management Science
Macroeconomics
Purchasing and Supply Chain Management
Cornerstones of Cost Management (Cornerstones Series)
Microeconomics
Economics (MindTap Course List)
Cornerstones of Financial Accounting
Managerial Accounting
Microeconomics: Private and Public Choice (MindTap Course List)
Understanding Management (MindTap Course List)
MACROECONOMICS FOR TODAY
Economics: Private and Public Choice (MindTap Course List)
Principles of Microeconomics
Micro Economics For Today
Macroeconomics: Private and Public Choice (MindTap Course List)